Download e-book for kindle: Collateralized debt obligations and structured finance : new by Janet M. Tavakoli

By Janet M. Tavakoli

"Collateralized Debt duties and based Finance offers a cutting-edge examine the exploding CDO and established credits items marketplace. monetary specialist Janet Tavakoli - writer of the commonly renowned credits Derivatives and artificial constructions - examines numerous securitization themes by no means sooner than obvious in print, together with the large raise within the CDO arbitrage created by means of synthetics; the tranches most Read more...

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Additional info for Collateralized debt obligations and structured finance : new developments in cash and synthetic securitization

Sample text

The credit risk is viewed as negligible. As we say in the United States, it is close enough for government work. This perception of safety for FHLMC and FNMA is not shared in the European market, and this initially made marketing of these securities in Europe more problematic. S. deal arrangers tried to sell floating rate mortgage-backed securities in the European market, they met with initial resistance. Investors were initially suspicious of the creditworthiness of GNMA. As investors learned more about the entities, the resistance to investment abated.

I don’t usually introduce a concept by saying people shouldn’t rely too much on it, but in this case, a little caution is a good thing. Recent gaming of diversity scores has led some CDO investors to be complacent about risk. Diversification is merely one of several important structural features. Now, let’s step back and look at this key concept in investment theory in the context of securitization. For the moment, assume portfolio returns are normally distributed. Now that we’ve assumed a distribution of returns, we can use historical data to calculate the mean, variance, and correlation of the assets.

CDOs are either arbitrage deals, balance sheet deals, or both. Both can be any combination of cash and synthetic underlyings. Arbitrage CDOs take advantage of greater market prices for the underlying obligations versus the price at which the combined liabilities can be sold. Balance sheet CDOs are normally used for regulatory capital relief, although funding may be another motive for a balance sheet deal. Arbitrage CDOs are either market value CDOs or cash flow CDOs. They can be backed by either cash assets, synthetic assets, or a combination of both.

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